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Credit Mix: Can It Affect Your FICO Scores?

Good credit can improve your finances in almost every way. It can help you buy a house, borrow money to upgrade to better roof gutter protection, and afford a comprehensive auto insurance policy.

If you are familiar with how FICO scoring models work, you probably know that your payment histories matter most to be a consistent member of the “800-point club.”

Common sense will also tell you that maintaining a low level of debt and a high average of credit age make you a less risky borrower. Lenders will attest that they like to count the number of hard inquiries on credit reports to see how debt-hungry or -reliant a person is.

What is less talked about, though, is credit mix, which accounts for 10% of your FICO scores. Since balance is vital to your financial health, you should pay more attention to it than you like to care.

While the credit mix can be self-explanatory, it is not as straightforward as its name suggests. Today, let us debunk the most common misconceptions about it.

Revolving Credit Refers Only to Plastic

Revolving consumer credit is synonymous with credit cards, which need no introduction. Contrary to popular belief, though, there is another line of credit that you might not hear being said in the same breath as plastic: HELOC.

Shorthand for a home equity line of credit, HELOC is a cross between a credit card and a secured loan. It allows you to borrow against your home equity and enjoy to access a ton of cash on demand.

A HELOC’s term is divided into two: the draw period and the repayment period. The former still requires repayment, except it only involves the interest. When the latter kicks in, the amount borrowed (your only debt) is amortized so that you can manage small payment with the principal and interest portions.

Signature and Title Loans Are Non-factors

Installment credit refers to the loans we are all familiar with. They have a fixed end date where they mature. Amortization and monthly payment are two concepts the define installment credit best.

However, not all installment loans can be used to diversify your use of credit. Signature and title loans have a reputation for not adding value to a person’s credit mix, for their lenders notoriously do not report payment information to credit bureaus.

But then again, this truth is not universal. Some signature and title loan lenders are diligent data furnishers. They go out of their way to submit the payment histories of their customers to credit-reporting agencies.

Lack of Credit Variety Spells Disaster

Frozen gutter

A healthy mix of credit is better than a one-dimensional file. Nevertheless, you should not diversify the types of credit you use for the sake of diversification. You should only open a credit card account or take out a loan when it makes sense to your situation. If you are not ready to handle numerous debts, you may inadvertently drive down your FICO scores.

Credit mix is essential, but you can live without it. If you are already juggling credit card bills with installment loan payments, make sure to handle all of them properly.